As published in Scotsman Guide's Residential Edition, May 2010.
The Federal Housing Administration (FHA) has experienced substantial losses to its Mutual Mortgage Insurance Fund (MMIF) and faces a likely government bailout, according to Andrew Caplin, professor of economics and co-director of the Center for Experimental Social Science at New York University. He and several co-authors noted as much in a recent study using Los Angeles County data (sctsm.in/w15802), and he said so in testimony (sctsm.in/Caplin0310) to a House Financial Services Subcommittee this past March. He tells us more.
What is your primary concern with FHA?
FHA’s actuarial report [for fiscal year 2009], stating that government support won’t be needed, is extraordinarily compromised. The losses to the MMIF are much higher than the FHA states. Why [FHA hasn’t] apologized and redone the numbers is beyond me. At some point, FHA will have to go to Congress for money.
How has the FHA responded to your study and testimony?
[FHA officials] say our study is flawed. They state that other studies have been done and that it can’t be confirmed that FHA is going to go bankrupt.
In your House-subcommittee testimony, you stated that FHA must change the way it determines potential losses. How?
To build a better loss model, the FHA needs to correctly identify streamline refinances, get the initial [loan-to-value ratio] correct on these refinances, use less-biased measures of home value, and incorporate delinquency and modifications that are ongoing —which are early warnings on future losses. When all four modeling changes are made, we will have a legitimate loss estimate.
Do you consider the FHA’s recent actions, including the addition of a chief risk officer and changing some key underwriting guidelines, to be partial solutions?
[FHA must] show that the particular measures are important. As yet, [FHA has] no demonstration of their quantitative significance. Indeed, [FHA] cannot do this at present, given [FHA’s] limited knowledge of the trajectory of losses.
How do we avoid an FHA bailout?
FHA has to ensure that the existing mess is sorted out. The large mass of at-risk mortgages will be defaulting in large numbers in the coming years unless there is a very shocking turnaround in the economy and the housing market. [FHA has] to get modern regarding risk assessment and evaluation. Be more innovative, for example, in the form of shared-equity finance.
We’re looking to make sure that when the problem occurs — the need to use taxpayer funds for a bailout — FHA can’t say it was “shocked” [or] that [the bailout] was unpredictable. A bailout is inevitable. The question is how to demonstrate better control so that this will not be needed in the future.
David Robinson, former editor of Mortgage Originator magazine, is a California-based writer and editor. For questions or comments about this article, e-mail firstname.lastname@example.org.